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Sub-section (1) deals with the modes of introduction of a partner whereas sub-section (2)
talks about his liability.
In such cases, even if some of the partners are unwilling to the introduction of some
particular person, they will be bound by their contract and the introduction will be
valid. The position as explained in Lovergrove v Nelson,1 is: “To make a person a
partner with 2 others, their consent must clearly be had, but there is no particular
mode or time required for giving that consent; and if three persons enter into
partnership by a contract which provides that, on one retiring, one of the remaining
1
(1834) 3 My & K 120.
two, or even a fourth person, who is no partner at all, shall name the successor to take
the share of one retiring, it is clear that this would be a valid contract which the court
must recognise and the new partner would come in as entirely by the consent of the
other two, as if they had adopted him by name.”
In Byrne v Reid,2 A, B, C and D were four partners and they, in their partnership deed,
authorised A to admit his son, S into partnership when S had attained the age of
twenty-one years. After S attained the age of twenty-one years, A nominated him as a
partner in accordance with the partnership deed and he accepted the nomination, but
the other partners refused to recognize him as a partner. It was held that the son on
accepting the nomination had become a partner.
2
(1902) 2 Ch. 735.
3
AIR 1997 Bom. 225.
“We are jointly and severally responsible to the bank for the liabilities of the firm with
the bank. The bank may recover its claim and dues from any or all of the partners of
the firm and the assets of any deceased partner.”
The fourth partner in this case had undertaken liability which existed prior to his joining the
firm and he was, therefore, held to be jointly and severally liable in respect of such liability.
The position of a minor becoming a partner under s 30 is, however, different. His liability
towards third parties does not commence from the date of his becoming a partner, but it
relates back to the date of his admission to the benefits of partnership.4
OUTGOING PARTNERS
Ss 32 to 38 deal with different ways in which a partner may cease to be a partner and his
rights and liabilities thereafter. These provisions pertain to situations when the outgoing
partner ceases to be a partner, but the firm is not dissolved and it continues with the
remaining partners. A partner may cease to be a partner in the following ways:
a) By retirement;
b) By expulsion;
c) By insolvency;
d) By death.
4
S 30 (7) (a).
it, in other words, it does not determine partnership inter se between all the partners. I
only serves the partnership between the retiring partner and continuing partners,
leaving the partnership amongst the latter unaffected and the firm continues with the
changed constitution comprising of the continuing partners. S 32 provides for
retirement of a partner but there is no express provision in the Act for the separation
of his share and the intention appears to be that it would be determined by agreement
between the parties. S 37 deals with rights of outgoing partners. Although the
principle applicable to such cases is clear but at times some complicated questions
arise when disputes are raised between the outgoing partner or his estate on the one
hand and the continuing or surviving partners on the other in respect of subsequent
business. Such disputes are to be resolved keeping in view the facts of each case
having due regard to ss 37 of the Act. S 48 deals with the mode of settlement of
accounts between the partners after dissolution of the partnership firm. The plaintiff
had retired from the firm on 5.4.1971 after selling his share in the partnership firm.
Once he had retired from the partnership firm, he had no right to claim any further
share in the profits of the firm. A finding of fact is also recorded that the defendants
had not paid the value of the share of the plaintiff pursuant to the agreement for
retiring from the firm. If the defendants have failed to pay the value of the share of the
plaintiff as agreed to, it has become a debt on the defendants and the plaintiff is
entitled to recover the same with interest. After the retirement from the partnership
firm and particularly when the firm was reconstituted with new partners, there was no
question of using the plaintiff’s share for earning profit in the reconstituted firm. The
High Court, despite specific request by the counsel for the plaintiff in A.S. No. 481 of
1979 to give a direction regarding the date on which the valuation of the plaintiff’s
share shall be arrived at, did not give a direction but directed the trial court to make
inquiry into valuation and decide the date taking into account that his share was not
paid till then. There is no nexus or reason to say that the relevant date for valuation of
the share of the plaintiff is the date when the Commissioner valued his share, that too
after a long lapse of time and taking note of the events that the plaintiff had retired
from the firm on 5.4.1971 having sold his share and the firm had been reconstituted
with new partners. When the plaintiff retired from the partnership firm on 5.4.1971.
His share could be valued as on that which stands to reason. Once the valuation is
made as on that date, for any delay in payment he is to be compensated by awarding
interest as is evident from section 37 of the Act itself. The value of the share of the
plaintiff on the date of his retirement from the firm could be regarded as apure debt
with effect from the date on which he ceased to be regarded as a pure debt with effect
from the date on which he ceased to be a partner as per the agreement entered into
between the parties. Otherwise, the result would be that he was deemed to have been
continued as partner of the firm even after he retired from the firm by selling his
share. If consideration was not paid as per the agreement, he could enforce it as per
law. However, mere non-payment of consideration does not take away the legal effect
of retirement from the partnership firm. The cause of action of the plaintiff arose on
the date of his retirement from the partnership firm and on which date the liability of
the defendants also arose. In this view, the plaintiff could certainly claim the value of
his share as on 5.4.1971 with interest till the payment was made.The view of the trial
court that the relevant date to value the share of the plaintiff is as on the date of the
commissioner’s report cannot be accepted, as there was no nexus between the date of
retirement of the plaintiff from the firm and the date of the commissioner’s report.
The date of the commissioner’s report may be fluctuating, i.e., it could be earlier or
later in the absence of any time-frame. In this view, the High court was right and
justified and justified in passing the impugned order upsetting the order of the trial
court.
In case the agreement between the partners themselves condones the requirement of
the consent of them all. A partner may retire accordingly. For instance, the partnership
deed provides that a partner may retire with the consent of the majority of other
partners or by giving one year’s notice, a partner can retire in accordance with such an
agreement.
In a partnership at will, a partner may retire by giving a notice in writing to all the
other partners of his intention to retire by giving a notice in writing to all the other
partners of his intention to retire.
The need for such a notice arises when all other partners either do not agree to the
retirement of a partner or they are not readily available to give their consent for the
retirement of a partner.
In case of partnership at will, a partner could also retire either under s 32 (1) (a) with
the consent of all the other partners or under s 32 (1) (b) in accordance with an
express agreement by the partners.
His position after retirement. -The question arises regarding liability of a retiring partner for
the acts of the firm done-
1) Before his retirement,
2) After his retirement.
5
S 41 (a).
6
AIR 1983 SC 523.
7
CIT v AW Figgis & Co AIR 1953 SC 455, para 7.
8
S 25.
The above mentioned procedure for discharge of a retiring partner from liability is by way of
novation. Novation means substitution, with the creditor’s consent, of a new debtor for an old
one. This is done by substituting a new contract in place of an old one, thereby discharging
the liability of the original debtor and creating that of a new one in his place. It is essential
that the creditor must agree to such a substitution. For example, X has a right of action
against the partners A,B& C. A retires and then X agrees to make only B & C liable. A is
thereby discharged from his liability. In partnership when the creditor accepts the security of
continuing partners in discharge of that of the former partners, the outgoing partner is thereby
discharged from his liability towards such creditor. Sub-sec (2) to s 32 requires that for the
proper discharge of the retiring partner from liability, there should be a contract between all
the three parties viz., the outgoing partner, the members of the reconstituted firm and the
creditor. Mere agreement between the outgoing and the continuing partners that only the
continuing partners will be liable for all the past acts does not discharge the outgoing partner
from his liability towards the creditor. The concurrence of the creditor also must be there to
such a contract. Such an agreement need not always be express, it may be implied by a course
of dealing between such third party (creditor) and the reconstituted firm after he had
knowledge of the retirement.
In Evans v Drummond,9 A and B, the two partners in a firm executed a bill in favour of a
creditor X. A retired and thereafter on the due date the bill was not paid to X but a new bill
signed only by B was given to X, who fully knew of the change in the firm. It was held that
by accepting the new bill signed only by the continuing partner, the creditor had relied on his
sole security, and had discharged the retiring partner from liability.
The decision in K.J. George v State Bank of Travancore,10 is another example of novation
whereby the retiring partner was discharged from his liability towards the creditor bank. In
this case, the respondent bank granted overdraft facility and medium term loan to a
partnership firm which included defendant as the partner. While the amount still remained
unpaid to the bank, the defendant retired from the partnership firm on 10th March 1983. The
notice of the retirement of the partner was duly sent to the said bank.
Thereafter revival letters in respect of the loan and a subsequent agreement was entered into
between the bank and those partners who continued the business. The retiring partner was not
a party to the revival agreement entered by the bank with the firm after his retirement.
Moreover, the entire liability towards the bank was taken over by the continuing partners. The
bank also never required the defendant, i.e., the retiring partner to sign the revival agreement.
It was held that the bank had accepted that the partners of the reconstituted firm alone will be
liable for the debts of the firm. The retiring partner was, therefore, discharged from his
liability towards the respondent bank.
(4) Notices under sub-section (3) may be given by the retired partner or by any partner
of the reconstituted firm.
By retirement a person ceases to be a partner. The third parties can still presume mutual
agency between the outgoing and the continuing partners until a public notice of retirement is
given. S 32 (3), therefore, provides that in the absence of a public notice, the outgoing partner
and the continuing partners continue to be liable for the act of each other towards third
parties. In order to avoid such liability, it is in the interests of both the retiring and the
continuing partners that public notice is given. It has, therefore, been provided in sub-sec. (4)
that such a notice may be given either by the retired partner or any partner of the
reconstituted firm.
Public Notice
According to s 72, a public notice means a notice in the Official Gazette, in at least one
vernacular newspaper circulating in the district where the firm to which it relates has its place
or principal place of business, and if the firm is registered, to the Registrar of Firms
concerned. Therefore, merely publication of the notice in a local newspaper is not sufficient,
and such anotice does not absolve the outgoing partner from liability towards a third person.
The liability stated above which arises in the absence of public notice is nothing but the
application of the doctrine of holding out. There is a presumption that a person who was
known to be a partner continues to be so known to the third parties until the notice of
retirement is given.
The principle was thus explained in Scarf v Jardine11:
“The principle of law, which is stated in Lindley on Partnership is inconvertible,
namely, that ‘when an ostensible partner retires, or when a partnership between
several known partners is dissolved, those who dealt with the firm before a change
took place are entitled to assume, until they have notice to the contrary, that no change
has occurred; and the principle on which they are entitled to assume is that of the
estoppel of a person who has accredited another as his known agent from denying that
agency at a subsequent time as against the person to whom he has accredited him, by
reason of any secret revocation.’ Of course, in partnership, tthere is an agency. One
partner is agent of another; and in the case of those who under the direction of the
partners for the time being carry on the business according to the ordinary course,
where a man has established such an agency, and has held it out to others, they have a
right to assume that it continues until they have notice to the contrary.”
No expulsion is possible unless a power to that effect has been conferred by a contract. This
power must be exercised in good faith for the general interest of the whole firm. If the power
to expel has been exercised bona fide the same cannot be challenged in a court of law. In
Blissett v Daniel,13 according to the partnership agreement two-third or more of the partners
were empowered to expel a partner by a notice, without assigning any reason for the same.
Two-third of the partners signed and served a notice of expulsion on one of them. It was
12
(1949) 2 KB 397.
13
(1853) 10 Hare 493.
found that the real reason for such a notice of expulsion was not to protect any commercial
interest of the firm but that the partner sought to be expelled had opposed the appointment of
a co-partner’s son as co-manager with his father. It was also found that the offended father
was instrumental in managing the expulsion. It was held that notice of expulsion given under
the circumstances was void.
Expulsion of a partner, who has been held guilty of an offence, has been considered to be
justified. In Carmichael v Evans,14 the power to expel existed against any partner who was
addicted to scandalous conduct detrimental to the partnership business or was guilty of any
flagrant breach of duties relating to a partnership business. One of the partners was convicted
for travelling without a ticket, and he was given a notice of expulsion by the other partner. It
was held that the notice of expulsion given under these circumstances was justified.
As regards the liability of his estate for the acts of the firm done after his death, the
position is the same as in the case of an insolvent partner. If the firm is not dissolved
on the death of a partner, the estate of the deceased partner is not liable for acts of the
firm done after his death.17
This section deals with the right of the outgoing partner with regard to some other
business which he may like to carry on. Sub-sec (1) states that an outgoing partner,
whether he leaves the firm by retirement, expulsion or insolvency, has a right to carry
on a business competing with that of the firm. He may also advertise such business.
This right to carry on the competing business is, however, subject to three restrictions:
1. He cannot use the name of the firm for his business.
2. He cannot represent himself as carrying on the business of the firm and, therefore,
he is not allowed to mislead the public by misrepresenting that he is still carrying
on the firm’s business.
3. He cannot solicit the customers or persons who were dealing with the firm. He
cannot approach the old customers to persuade them to be diverted towards his
business. It has been noted that he can advertise his own business and if the old
customers of themselves prefer to come to him, there is no bar to his attending to
them.
The abovestated restrictions on the outgoing partner are necessary to protect the interest of
the firm which he leaves. The restrictions are similar to those which are imposed on a person
who sells the goodwill of his business.18 When a partner leaves the firm, he gets his share of
the assets. Such share generally includes payment for his share of the goodwill also. Outgoing
partner is presumed to have sold the goodwill to the remaining partners and, therefore,
restrictions as stated above are applicable to him. These restrictions are subject to contract
between the outgoing and the other partners.
18
S 55 (2).
i) The agreement restraining the outgoing partner from carrying on a similar
business should stipulate that such a business will not be carried on for a specified
period or within specified local limits, and
ii) The restriction imposed should be reasonable.
For the purpose of ascertaining the share of a retiring or an outgoing partner, the relevant date
is the date on which he ceased to be a partner.
If an arbitration award grants interest at the rate of 9% per annum instead of 6% per annum, it
is an error apparent on the face of the award, and therefore, this part of the award will not be
enforceable.19
In K.S. Rao v Venkateswarlu,20one of the partners left the firm and the firm was reconstituted
with the remaining partners. The share of the outgoing partner continued to be utilised by the
reconstituted firm. The earlier partnership deed had provided that a partner would get 12 %
interest on the capital brought in by him. The outgoing partner claimed interest of 12% on his
share remaining in the business after he left the firm.
It was held that on such sum remaining in partnership firm, the outgoing partner could claim
interest of 6% p.a. as stated in s 37 and not any higher interest. The only other option
available to an outgoing partner is to claim such share of profits as may be attributed to the
use of his share of the property of the firm.
This is subject to contract between the partners to the contrary.
The abovestated option can be exercised by the outgoing partner or on behalf of the deceased
partner when subsequently the profits are calculated. He can then exercise this option the way
he finds the same to be more beneficial to him. But once the option is made, it becomes
binding on the person making it.
Where by a contract between the partners, thee surviving or the continuing partners purchase
the share of the outgoing or the deceased partner, the right of sharing profits as discussed
19
Nirmalabhai v Girjabhai, AIR 1986 SC 338.
20
AIR 1997 AP 331.
above is lost. If, however, the partner who was to purchase such share of the outgoing or the
deceased partner does not comply with the terms of the contract of purchase in all material
respects, he is liable to account for the right of the outgoing or the deceased partner as stated
above.
21
S 129, Indian Contract Act.
22
(1901) 28 Cal. 597.